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JO Hambro fund celebrates a decade of dynamism
‘I am higher conviction than I’ve ever been on how we add value, why we do what we do, how it works and why it works,’ says Alex Savvides, senior fund manager of his brainchild product, the JOHCM UK Dynamic Fund (GB00B4T7HR59).
This collective seeks to profit by backing positive corporate change and offer investors a compelling combination of recovery situations, and restructuring and ‘hidden growth’ stories.
Launched on 16 June 2008 in the teeth of the financial crisis, the fund has just celebrated its 10 year anniversary and has proved an impressive performer.
Trustnet’s five year cumulative performance data shows the fund up 77.3% versus a 57.1% gain for the IA UK All Companies sector.
Savvides believes the market’s misunderstanding of corporate change – typically new management teams with new strategies – regularly throws up opportunities for patient, disciplined and unemotional investors.
His process aims to profit from understanding change and investing where there is the highest probability of success but with the highest cash-based valuation support. This approach typically leads him to put money to work with high quality, unloved and under-researched UK companies, often in out-of-favour areas of the market.
Following an extended bull market run, finding stocks at rock bottom valuations is more of a challenge, yet Savvides insists: ‘There are always opportunities to invest in companies where management teams have been underperforming relative to the capabilities of those companies and I think that is genuinely stock market and economic cycle agnostic.’
‘There are always companies trading in their own little lifecycle, their own little general economic cycle and therefore there is always going to be some raw material for us. Having said that, it is always easier for us when the general level of everything is cheaper and you usually get those situations nearer to low points of cycles.
‘We are somewhere in the other direction at the moment but a big portion of our return has always been delivered by the self-help element within stocks.’
Savvides stresses he never invests without meeting management teams and is highly selective over the people he’ll back.
‘Our whole process is about backing an essentially good asset that is underperforming with an essentially good management team that get it in terms of knowing the value of a pound and knowing simplistic things like return on equity without having to work it out on a spreadsheet,’ he explains. ‘Marrying up good management with an interesting stock situation is what makes this process work.’
Despite current high political risk, Savvides is much more constructive around the UK than he has been for a long time. The fund has roughly a third of its assets in UK-facing stocks, up from circa 20% going into Brexit.
Savvides says attitudes towards the UK economy broadly have been ‘too negative’; the delivery of a ‘reasonable’ Brexit deal could brighten the overall picture and the real wage squeeze is ending.
Last year, JOHCM UK Dynamic Fund added to names which had suffered following the uncertainty engendered by the snap general election, among them Restaurant Group (RTN) where Savvides thinks negative sentiment linked to the Frankie & Benny’s brand is now outdated. The fund also beefed up holdings in grocer WM Morrison Supermarkets (MRW) and defence specialist QinetiQ (QQ.).
Other additions included Tesco (TSCO), Daily Mail & General Trust (DMGT) and tool hire firm Speedy Hire (SDY), whose new management team continues to reduce the size of its hire fleet while increasing return on capital employed, a measure of how effectively a company reinvests cash back into its business to generate additional returns.
Savvides notes Speedy Hire’s return on capital is now higher than its cost of capital ‘for the first time in a generation’. He says the business has invested that capital in parts of the industry that are growing, such as testing, inspection and powered access.
The savvy Savvides invested in consumer media-to-business information group DMGT about a year ago and dubs the company ‘a fascinating situation’, with a new Lord Rothermere (DMGT chairman)-backed CEO and FD – Paul Zwillenberg & Tim Collier respectively – having ‘instigated a process of radical change across the organisation’.
DMGT’s stake in Euromoney (ERM) has been reduced, US property asset EDR sold and the sale of the company’s 30% stake in ZPG (ZPG) to Silver Lake should bring in another £640m of proceeds. ‘DMGT will have to invest it, but I think they’ll invest it wisely or they’ll return cash to shareholders,’ enthuses Savvides. ‘To me, that represents everything that is good about change investing.
‘I now have to have belief this management team will allocate capital correctly. There is nothing this team has done since they’ve become chief executive and finance director of DMGT that leads me to believe they’ll take poor decisions,’ he concludes.
JOHCM UK Dynamic Fund: Top 10 holdings
Lloyds Banking 4.0%
Source: JOHCM, as at 30 April 2018